Look for post-correction market highs

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

The European issue returned to the limelight Wednesday in the form of a weak Spanish bond auction, giving some participants the excuse they needed to take some chips off the table.

More ominously perhaps is the notion that the US could possibly find itself in the same shoes as Spain not too far down the road.

Wednesday's selling was not unusual. Nasdaq
COMP, -0.23%
volume was 5% above normal and New York Stock Exchange activity was 7% below average.

Meanwhile, volume in the typical glamour was 26% below average. This speaks of the comfort in which speculators and institutions have in the current trend.

From the standpoint of the speculator, it would not be the worst thing in the world for the averages to take a breather here. This would allow for the creation of new pattern setups. Very few exist currently, thanks to the post-Dec. 19 unidirectional advance.

The fact that shares also sold down upon Mr. B's admission that the economy does not need as much easy money as had previously been the case is not a surprise. Of the two macro determinants of price movement, interest rates and earnings, it is the former that carries more weight. This is the reason why most bull markets show the heftiest gains in the first year or two, when rates are dropping.

Because the market looks ahead roughly six to nine months, standout earnings often coincide with a bull market top. In other words, buy the hope, sell the fact.

This has clearly been a strong trend. A trend of this extent and duration does not tend to end and become a new bear market without a period of back-and-forth price movement. In other words, a loss of momentum.

In the old days, pre-ETF, it was handy to watch the cumulative NYSE advance-decline line to recognize this loss of momentum in an established bull market. These days, with decimal pricing and ETFs, this yardstick is less valuable.

A session like Wednesday, and especially any sort of substantive correction, can offer an entry opportunity in certain issues that have become extended above their most recent basing patterns.

At the same time, there should be no reason to sell leaders such as Ulta Salon
ULTA, -0.42%
Apple
AAPL, -0.32%
Priceline
PCLN, +0.79%
Chipotle Mexican Grill
CMG, +6.62%
among others, if a speculator entered at the price points discussed in these reports.

Among the names, luxury-apparel manufacturer Michael Kors Holdings
KORS, -1.28%
came public Dec. 15 and went on to double in its first two months. This is the type of strength in a recent new issue that is worth paying attention to. Most analysts expect earnings growth of 79%/41% in the March '12/'13 fiscal years.

Technically, the stock has not yet formed a base from which a suitable entry could be made for an intermediate-term advance. This is one of the challenges of intermediate-term speculation in aggressive growth titles. You are either going to cheat and enter stocks that do not have a base on their chart, or you are going to be patient and wait for the more attractive setups to show up.

KORS is forming a constructive pattern of three weeks' length, as shown below. This is a fairly tight pattern, and does not show much distribution despite the stock making such a large move. A potentially attractive entry may coincide with a takeout of the Mar. 9 high of 50.69, provided there is confirming volume on the breakout day. It will be important to observe how price behaves amid any further market weakness. Wednesday was the fourth up day in the last five vs. four down days in the last five for the Nasdaq Composite. This is the type of objective information that is more important than personal opinion or prediction.

United Rentals
URI, +0.47%
a renter and seller of construction and industrial equipment, and with expected earnings growth of 62%/37% for '12/'13, according to most analysts, cleared a five-week flat base Tuesday on volume 76% above average. This was a nice, tight base that may have allowed the stock to adequately digest its prior run-up. Wednesday saw sellers emerge to drive price back into its base. A potential entry might present itself on a takeout of the 45.08 high of Tuesday, provided there is confirming volume on the breakout day, and a protective sell stop is used in case incorrect.

Elsewhere, Zillow's
Z, -0.66%
Tuesday high of 38.34 could potentially be used as an entry point following its strong breakout of its base on Monday...Yandex
YNDX, +0.33%
the Russian Internet services provider, is being watched to see if it attempts to scale its 28.14 high of Tuesday, which may provide a potential entry depending upon its price/volume behavior between now and then.

Looking ahead, it will be worthwhile to keep an eye on the recent new issues. The ones that pull back just a little, like Z, may well be the ones that spring forward when the weight on this market comes off.

In summation, given the extent and duration of the post-Dec. 19 advance, historical precedent favors a post-correction move to new highs in the averages, not a new bear market. In the meantime, the intermediate-term speculator should be alert to new pattern setups forming in the cycle's leadership.

At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.